How Big a Deal is Twitter's New Video Ad Service?

After facing a relatively challenging first half of the year, Twitter’s (NYSE:TWTR) share price has exhibited strong performance over the last month as it has gained around 13% in trading. The stock price has seen a series of highs and lows since it debuted on the exchange at a price of $26 essentially because of the slower than expected rate at which it has added monthly users. However, the results for the second quarter provided considerable relief to investors and analysts after the company announced better than expected monthly average users (MAU) numbers and non-GAAP earnings of $0.02 per share compared to the consensus $0.01 EPS loss.

It’s about data

Now, in my previous articles on digital advertising companies I have mentioned the extreme significance of the user database. Fundamentally, the business model of Facebook, Google and Twitter is similar, and hence, advertisers flock to those websites wherein they get better than expected return on investment (ROI) along with greater visibility. In that context, the database size becomes highly important. Fancy this, Facebook reported a massive 1.32 billion monthly active users (MAU) as of June 2014, of which around 839 million users accessed the website on a daily basis. In contrast, Twitter’s latest earnings reports cited 271 monthly active users. However, this number was ahead of Street’s expectation due to which the shares of Twitter escalated around 34% after the results.

In keeping with the target of increasing users and providing the advertisers with avenues to interact and engage with the users, Twitter has launched its new video advertising service following months of trial and error. As per a report from Business Insider, online video is growing faster than most other advertising formats. It is estimated that the video ad revenue will grow at a three-year compound annual growth rate (CAGR) of 19.5% and will become a $5 billion market through 2016. Hence, the promoted video ad service started by Twitter as part of the Twitter Amplify program is definitely the need of the hour.

You might not be a digital advertising enthusiast, but it is still important to understand the mechanics of this new service in order to analyse its impact on Twitter’s earnings. Basically, the promoted ads service will allow advertisers/content creators to upload and distribute their videos on their Twitter network. Additionally, this particular service will work on a Cost-Per-View (CPV) basis thereby facilitating payment only when the user clicks on the video. For a big advertiser, video ads present a valuable branding proposition as the advertiser is at liberty to use various graphics/acts/demos etc. Thus, the launch of this promoted ad service will allow Twitter to reach out to a wider group of advertisers especially big ticket advertisers who focus on brand advertising.

In fact, this video ad service follows the heels of its Twitter Amplify program, which previously focused on big media companies including the likes of ESPN which uses Amplify to promote highlights from other games. Twitter’s primary competitors – i.e., Google and Facebook – have a solid portfolio of video ad offerings. As a matter of fact, Facebook has a customized premium video ads product as a way for advertisers to drive branding objectives on the website. Premium Video Ads are designed for advertisers who want to reach a large audience with high-quality sight, sound and motion. Each 15-second video ad will start playing without sound as it appears on screen and stop if people scroll past. If people tap the video, it will expand into a full-screen view and sound will start. Thus, Facebook has also innovated on it video ad delivery in order to provide the advertisers with an avenue to reach a massive audience.

Takeaway

It is clear that Twitter has not been able to grow its user base at the expected rate, but the fact that it is attempting to provide advertisers with all possible alternatives to engage with users, is impressive. This new promoted video ads feature will put Twitter in the same league as other digital advertising conglomerates and attract more advertisers. It will be interesting to see how Twitter further develops this video ad service and leverages the opportunities in display advertising.

About the author:

Riddhi Kharkia

A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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